Confusing a Correction with a Bear Market

Hi everyone,

I hope you’ve had a good week. In my previous blog we looked at some of the setups that we had identified using our Checklist Report, particularly in currencies, and also stocks. Since then the S&P 500 has shed another -2.5%, contributing further to the losses seen this month. But markets of course do not go down in a straight line, and there have been opportunities to trade both ends of the range in line with what our US Equities Checklist showed us as we headed in to September.

Here’s a reminder of the neutral score which replaced the successive positives that we had seen for the past few months. It alerted us to the potential for the (until now) relentless upwards momentum seen in stocks, and suggested that we may see choppier price action this month.

Looking to the chart, you can see how tactical trading (both long and short) of the range has worked pretty well for us so far, using the hourly RSI as a simple example of how this might be done. Whilst one might have been ‘stopped out’ of the second trade (long), the third and fourth trades (long and short, respectively) would have worked well.

As an aside, I have heard a lot of noise coming from media outlets repeating the narrative that growth stocks had ‘gotten too expensive’ and that this sell off was the tech bubble bursting. Although those names have taken the brunt of the selling, the likes of Facebook (a stock you all know I follow closely) are still higher than they were four weeks ago. So it is hardly a tragedy to see a few down days after six months of relentless gains, which has seen FB double. But, I digress. The chart I wanted to share with you for further perspective is Tesla (TSLA) which with the help of some Fibonacci analysis looks as though it simply hit the 261.8% upside target before the smart traders began taking profits. Is this ‘the end’ for tech? On this basis, I don’t think so!

There is a saying which goes “don’t confuse brains with a bull market”. In this case, I think the uninformed stock pundits are confusing a correction with a bear market. This headline is another reminder of what is actually going on with these companies beyond the stock market and the talking heads on 24 hour news channels. Is this ‘the end’ for Tesla? On this basis, again, I don’t think so!

I hope this helps put things in perspective and serves as a reminder that there is a lot more to the stock market, or your favourite stock, than the price on the screen and the media narrative. There are of course times when the market may be technically driven, or range bound as we have correctly identified for the S&P 500 this month. These also provide opportunities to profit, although it is rarely this easy in the long run. Successful trading requires discipline and devotion to your process, and you must be focused in such a constantly evolving environment.

Whether you like to trade stocks, currencies or commodities, our Trading Club service provides these Checklists in real-time along with our weekly commentary covering all the key markets.

If you would like to join us for our full analysis including new insights each week, or learn from the ground up with online tuition from Lex in our MDT online course, then head to milliondollartraders.com and take your financial knowledge to the next level right away!

Have a great weekend,

James

Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information. For more information go to www.milliondollartraders.com

© Copyright 2020 Lex van Dam Financial Education. Further distribution prohibited.